EU, the Grand Coalition and austerity. Where does Italy’s Renzi stand?

The choice of Juncker as the next president of the European Commission is in total continuity with the harmful policies of rigor imposed in recent years by the Troika. The Italian prime minister on the one hand seems to beat his fists against the diktats of Berlin, on the other hand make us believe – mistakenly – that more flexibility in the Stability Pact is enough to improve the situation. There will only be a break with destructive austerity if Matteo Renzi acquire courage and awareness of the impossibility of proceeding with the current rules argues economist Vladimiro Giacché

Failing improbable twists and gentlemen, the Christian Democrat of Luxembourg Jean-Claude Juncker will be the next president of the European Commission. The appointment, to be confirmed by the European parliament 15 July, took place on 28 June at the end of the European Council, with Hungary and much more seriously, Great Britain voting against.

Juncker as president of the Commission will not be good news. And certainly not for the reason maliciously advanced by the British tabloid the Sun, and promptly repurposed by the German equivalent Bild, which is the presumed nominee for President has an inclination for alcohol. [1]

The reasons for concern are much more serious. First, Juncker comes from a statelet known to most as a tax haven, in fact, a city of 127,000 inhabitants, which has never produced great statesmen. The precedent from Luxembourg set by Jacques Santer is not encouraging: the Commission under his leadership was overwhelmed by scandal and had to resign a year before the end of its term.

Secondly, and this is the fundamental reason for concern, it is a choice that expresses perfect continuity with the disastrous European policy of crisis management in recent years. Until 2012 Juncker was in fact the president of the Eurogroup, ie the coordinating group of Economy and Finance Ministers of the Eurozone. In this quality he supported all the policies adopted and was also the promoter of the proposal to confer the greek state assets to a fiduciary not controlled by the Greek State, but by foreign creditors, in order to privatize everything. The model which inspired Juncker was the Treuhand, a trust company that in the early nineties had privatized the whole economy of eastern Germany (GDR), with catastrophic results, leaving a budget hole of 250 billion marks at the time. [2]

Even when he resigned from the Eurogroup, in April 2012, he said in protest against Franco-German interference in the management of the crisis, Juncker did not fail to confirm his loyalty to Germany, proposing as his successor German Finance Minister Schäuble.

Finally, this appointment is the result of a political trade, for which the Social Democrat Martin Schulz will be confirmed at the helm of the European parliament even with the votes of the [right-wing] European Popular Party: the two nominations constitute a “Grand Coalition” at the European level between the Popular Party and Social Democrats. The real risk is that of a formidable majority in Parliament for the continuation of the austerity policies that have impoverished Italy and much of the continent.

That this line continues to be pursued by the most extreme wing of the German establishment is beyond doubt. This is demonstrated by the criticism of Matteo Renzi in Strasbourg by European Popular Party chief Manfred Weber (member of the Bavarian CSU), who reaffirmed the rejection of any “flexible” interpretation of European rules. To Weber, Renzi has done well to recall that Germany had been allowed in 2003 to exceed the 3% deficit rule to support reforms.

He might have added that Italy from 2008 to 2012 was the only eurozone country that has only implemented restrictive fiscal policies (with a negative impact on gross domestic product equal to 5 percentage points), while Germany during the same period has implemented expansionary policies, with a positive impact on GDP equal to 6 percent, thanks to 69 billion of incentives to enterprises and 259 billion of public money spent to bail out the German banks (and if you include guarantees that would reach the astounding figure of 646 billion). [3]

Even the president of the Bundesbank, Jens Weidmann, speaking at the Economic Council of the CDU (not really a point in favour of the autonomy of the German central bank …), is allowed to make fun of Renzi’s . speech to the European Parliament as Italy took over the EU’s revolving presidency. He got the answer he deserved: “We respect the status and mandate of the Bundesbank, but it must stay out of the Italian political debate,” said Renzi; He added, “We are not going to investigate the activities of supervision of the Landesbanken and Sparkassen”. This is a barely concealed hint at the failings in banking supervision of the Bundesbank, which proved beyond reasonable doubt that money from German taxpayers was used to save their banks, and in particular the regional banks, the Landesbanken.

Moreover, the supervision exercised by the German institutions over “their” banks is also highlighted in the negotiations for the so-called European banking union, in which Schäuble secured a very high (30 billion Euros of assets) threshold above which European supervision kicks in. This was designed to save the Sparkassen (only one of which – out of 417! – will be supervised by the ECB). And, last but not least, some of the few German banks that will be controlled by the ECB – 24 of 1,941 – will not have to present to the European inspectors their portfolios of real estate loans: that includes HSH Nordbank and Commerzbank, banks that are anything but in good health. [4]

It is certainly reassuring that the Italian Prime Minister, for the first time in a long while, sheds the good pupil role and responds in kind to the latest German arrogance. But are such exchanges satisfactory? It depends.

If their outcome in negotiating terms ends with the request for a bit ‘of “flexibility” in applying the rules of the “fiscal compact” – perhaps in exchange for more privatisation or freedoms to fire workers – the result will inevitably be the continuation of the misguided policies of the last government and, following in the footsteps of previous Italian PMs, Renzi’s rapid disappearance from the political scene?

These EU rules have brought our country to the brink of the economic abyss, a fate that is certain due to the need to maintain a structurally balanced budget, [5] but also to reduce debt of over 60% of GDP by as much as 5% per year: a real mission impossible (Wolfgang Münchau in the Financial Times called it “crazy”) that will have as the only plausible result prolonged economic depression, while the debt situation of our country will get worse because of deflation and the contraction of the economy.

Things could instead go differently if Renzi accepted the impossibility (economically even more than politically) of proceeding with the current rules. First, because they are aimed at two objectives that cannot be achieved. The first is the generalization of the German mercantilist model (as for mercantilism to work it must not be generalized). [6]

The second is the legal requirement to reduce the public debt on a scale that has no historical precedent, and what’s more in a deflationary environment (while in the past all the debt reductions were achieved through a series of measures, and that includes inflation). Neither of these goals can be achieved. And if you persevere along this path, the result will be the further impoverishment and desertification of industrial production in the countries of the periphery of Europe, and the uncontrolled and destructive implosion of the euro currency area.

We must change course. Much will depend on the willingness and ability of our government to change the European balance, which has been excessively altered in recent years in favour of Germany. One thing is certain: a European Commission led by Juncker will hardly be an ally.

[2] On the proposal of Mr Juncker see V. Giacché, Anschluss. L’unificazione della Germania e il futuro dell’Europa, Reggio Emilia, Imprimatur, 2013, p 272-4. On the Treuhand ibid pp 75-119. Among the many books on the subject you can see the well researched investigative work by D. Laabs, Der deutsche Goldrausch: Die Geschichte der Treuhand wahre, München, Pantheon, 2012.

[3] The figures on the impact of budget cuts on GDP are in: Istat, Annual Report, 2014, Rome, May 2014, p. 210. For the money spent in Germany and Europe in favour of the banks see M. Frühauf, “Milliardengrab Bankenrettung”, Frankfurter Allgemeine Zeitung, August 16, 2013.

[5] It should be pointed out that, “thanks to the” fiscal compact, the roof of which is a 3% maximum deficit with respect to GDP, this no longer exists as now the rule is 0%, from which we can deviate only in the event of a negative economic cycle. In fact, the recent criticisms ofItaly by the European Commission are based on the fact that the deficit, despite not having breached the ceiling of 3%, is still too high. On criticism based on these questionable criteria, see “Pacta servata sunt”, Rapporto CER. Aggiornamenti, Roma, Centro Europa Ricerche, March 25, 2014.

[6] It is interesting to observe how accurately the preference endorsed by the European Commission for the development of the mercantilist model, which sacrifices wages (and thus domestic demand) to the conquest of new markets abroad, has so far prevented – against the very same European rules – the opening of an infringement procedure against Germany for excessive macroeconomic imbalance, despite this country is set to exceed for the fifth (!) consecutive year the maximum allowed 6% of trade surplus. For more on this see F. Fubini, In merito v. F. Fubini, “Berlino sfora il tetto del surplus commercial ma la UE non si muove”, la Repubblica, July 5, 2014.